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CAND.MERC.SOL SEPTEMBER 2011

How does Multinational Enterprises from

developed markets succeed in emerging

markets?

-

An investigation based on Telenor

SUPERVISOR: JENS VESTGAARD – INSTITUTE OF ORGANIZATION

AUTHOR: HILDE CHRISTINE HILLESTAD PAGES: 80

STU: 181 306

Emerging markets are less developed markets that are at a later stage of development than other less developed markets. They are characterized by high growth potential, low market capitalization, and poverty. The most important difference between an emerging market and a developed market is that an emerging market is a market where buyers and sellers are not easily or efficiently able to come together The recent growth of emerging markets given them increased attention. The world’s largest emerging markets include Brazil, Russia, India, and China and they account for more than a quarter of the world's land area and more than 40% of the world's population. In addition to the four largest there are many other countries that are starting to emerge into the worlds formal economy, and together they represent an enormous growth potential for Multinational Enterprises (MNE’s) from developed markets. Recent research have been investigating the differences in emerging markets from developed markets with emphasis on the growth potential in these markets, and the challenges for MNE’s from developed markets who want to enter emerging markets. These challenges are mainly attributed to market conditions that differ from their home markets to a varying degree. This report builds on recent research by taking the focus away from what challenges that are inherent in emerging markets for MNE’s from developed markets, by investigating MNE’s that are already successful in emerging markets and thereby identify how challenges are handled, not only where they can occur. The research has been carried out by using one case company; Norwegian Telecom company Telenor to provide general conclusions for all MNE’s from developed markets that are doing business in emerging markets using the scientific logic “If this is (not) relevant for this case it is relevant for all (no) cases presented by Flybjerg (2004)

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Contents

1. Introduction ... 3 1.1 Telenor ... 5 1.1.1 Company information ... 6 1.2 Emerging Markets ... 7 2. Hypothesis ... 9 3. Research Area ... 9 3.1 Research Question ... 9 3.2 Topic Delimitation ... 10 4. Method ... 11 4.1 Methodology ... 12 5. Theory ... 14 5.1 International Production ... 14

5.1.1 Transaction Costs and the Multinational Enterprise (MNE) ... 16

5.1.2 Vertical and Horizontal Expansion into Foreign Markets ... 17

5.1.3 The Eclectic (OLI) Paradigm of International Production ... 18

5.2 Emerging Markets ... 20

5.2.1 Institutional Environment in Emerging Markets ... 21

5.2.2 The Consumers in Emerging Markets ... 22

5.2.3 Strategic Choices for MNE’s from Developed Markets in Emerging Markets ... 25

5.2.4 The Multinational Enterprise from Emerging Markets (EMNE) ... 28

5.3 Branding ... 30

5.4 Strategy... 32

6. Data Collection ... 33

7. Analysis ... 37

8. Telenor – From National Monopoly to Multinational Enterprise ... 38

8.1 Early Expansion ... 38

8.2 The First Moves Abroad ... 42

8.3 The Pattern of Strategy in Telenor’s Early Expansion ... 44

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8.5 Introducing the Telenor Group ... 47

9. Telenor’s Operations in Emerging Markets ... 48

9.1 The Learning Process – Telenor in Bangladesh ... 48

9.1.1 Lack of Infrastructure ... 49

9.1.2 Institutional Voids ... 51

9.1.3 Challenges in the Labor Market ... 52

9.1.4 Increasing the Customer Base ... 53

9.2 Dealing with Partners and Competitors in an Emerging Market – Telenor in Russia ... 54

9.3 Expanding in Asia – Telenor in Malaysia and Thailand ... 55

9.4 The First Steps towards Branding the Telenor Group – Telenor in Hungary ... 57

9.5 Expanding the Telenor Brand – Telenor in Montenegro and Serbia ... 58

9.6 Identification of New Opportunities in Emerging Markets – Telenor in Pakistan ... 59

9.6.1 Introducing Mobile Banking ... 60

9.7 Entering an Emerging Market as a Late Mover – Telenor in India ... 61

9.8 Discussion – Telenor’s Operations in Emerging Markets ... 64

9.8.1 Growth and Market Share ... 64

9.8.2 Target Consumers and Technological Development ... 66

9.8.3 Brand, Management and Corporate Culture ... 69

10. Scientific requirements ... 70

11. Conclusion ... 71

11.1 General Conclusions ... 74

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3 1. Introduction

This report is for individuals in developed countries who want to learn more about how enterprises from the developed world can do business in emerging markets. The reader of this report is either a student with a specific interest for business operations in emerging markets, or someone from a developed market who wants to pursue business in an emerging market, but know little about emerging markets.

Lately differences in emerging markets compared to developed markets, and what implications these differences can have for traditional multinational enterprises (MNE’s) operating in these markets, have received increased attention. Much of the world’s economic power today is vested in MNE’s. The MNE has its origins in the second industrial revolution of the 19th century. Of the 100 largest economies in the world, 51 are now global corporations, and only 49 are countries.In our time it is widely assumed that globalization is driven by the west and imposed by the rest. It is assumed that CEO’s in New York, London and Paris control the process, and Western consumers reap most of the benefits. This is changing fast. Emerging-market champions such as India’s ArcelorMittal in steel and Mexico’s CEMEX in cement are out-competing Western companies. In knowledge-based industry Infosys and Wipro, which are operating out of Bangalore in India, are taking over office work. Other companies from emerging markets that are rapidly taking market share in the international market include Huawei from China and Tata Motors from India. Some companies from emerging markets are even reversing the traditional global supply chain: Brazilian airplane producer Embraer buys many of its component parts from the West and does the assembly work in Brazil. Consumers in emerging markets are also getting richer faster than their equivalents in the West, which enhances the opportunities for growth in

emerging markets (Woolridge 2010).

It is argued by Woolridge, Guilén and Garcia-Canal (2010), and others, that the success of some

companies from emerging markets has come from their business model that in many aspects differ significantly from the business models in developed markets. Today many MNE’s from developed markets are competing in emerging markets. The four largest emerging markets in the world (India, China, Brazil and Russia) alone currently account for more than a quarter of the world's land area and more than 40% of the world's population. In addition there are numerous

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smaller emerging markets, and developing markets that are starting to emerge. In these markets there can be fierce competition, not only from other western MNE’s, but also from local competitors.

Recent research about business environment in emerging markets include Khanna and Palepu (2010)’s work Winning in Emerging Markets. The area received increased attention in the aftermath of the financial crisis of 2008. While the MNE’s from developed markets were recovering from the crisis, MNE’s from emerging markets went on a “shopping spree” and expanded their business by acquiring a wide range of developed market brands. Two examples out of many are that Jaguar and Rover are now owned by Tata motors from India, and IBM PC Systems are owned by Lenovo from China (Woolridge 2010). The economist dedicated a whole issue to the rise of emerging markets, and wrote a special report on emerging markets in April 2010 called “The world turned upside down – A special report on innovation in emerging markets”. Many other researchers, amongst them Woolridge (2010), and Guilén and Garcia-Canal (2009) are turning their research efforts towards this area. However, just as the flow of available research and literature in this area is developing fast, emerging markets are also developing and changing at an accelerated speed. Available research on emerging markets focus on investigating the operating environment in emerging markets, finding reasons for their rapid growth, identify success factors in emerging market-industry, identify the main differences between emerging markets and developing markets, and suggest methods for developed market MNE’s that want to enter emerging markets. Research has given less attention to the many MNE’s from developed markets that are succeeding in emerging markets. I want to build on research already provided by other scientists about emerging markets, keeping in mind that although there are increased competition from local competitors from emerging markets both in emerging markets, but also increasingly in international markets, many developed market multinationals are major players in both developed and emerging markets. My research will not focus on how the traditional global supply chain is starting to change due to rapid development in emerging markets, and the threats this represents to developed market MNE’s. Instead I want to investigate how a multinational enterprise from a developed market succeeds in an emerging market, by looking at companies that are already doing this.

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5 1.1Telenor

The Norwegian Telecom company Telenor’s operations in Eastern Europe and Asia have made them a major player in emerging markets. In this investigation Telenor is used as a critical case, or a case that is used as a representative of other cases. When searching for a case that could be used for this purpose I used an information-based strategy for selection of samples and cases. My goal was to find a critical case that allows me to achieve information that permits logical deductions of the type “is this (not) valid for this case, then it applies to all (no) cases” (Flybjerg 2004). Telenor is an especially good case to investigate the implications that can arise when a multinational company from a developed market is operating in emerging markets, for several reasons. Firstly Telenor fit my first criteria; they are a multinational company from a developed market who is operating both in developed and emerging markets. Being a company that has existed for more than 100 years they carry the typical characteristics of a developed market-based firm with their typical values and longstanding traditions. It is exactly this heritage that can create implications when adjusting to operating environments in emerging markets. Hence, if there are challenges in emerging markets due to being a typical MNE from the developed world, they should be encountered by Telenor. The value of investigating Telenor’s operations in emerging markets specifically, compared to many of their peers, lies in that Telenor was a first-mover in several emerging markets. This means that they had to deal with all the implications that are related to being a developed market MNE in that market, and hence their experiences in those markets will reflect the broadest range possible of the actual challenges and implications to business in that market. A company who enters emerging markets that is already inhabited by other developed market MNE’s will enjoy the benefits of efforts made by early entrants to adapt to the operational environment (Khanna and Palepu 2010). Therefore they may not have to deal with the same degree of challenges in emerging markets as first movers. Secondly Telenor is a good case for investigation because they are present in emerging markets in different regions. As stated by Khanna and Palepu (2010) emerging markets should be distinguished collectively from developed markets, but also individually from each other. By investigating a company that is present in emerging markets both in Asia and Europe I get the opportunity to investigate if emerging markets differ from each other, and the implications to strategy related to this.

There is a wide range of companies to choose from that fit these criteria. Early I narrowed my search for case companies down to companies that fit the criteria above, that is also in the

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telecom sector. The reason why a company from the telecom sector is especially interesting when investigating business strategies in emerging markets is the rapid growth in this sector. Between 2000 and 2005 the number of mobile subscribers in developing and emerging economies grew more than a fivefold (Allen et al 2007). The use of mobile phone has improved living standards of millions of people by providing easier communication, access to quick medical help, job opportunities, and even banking. The benefits of the mobile phone has transformed into success for mobile companies in emerging markets and competition can be fierce, both from other multinationals, but also from local companies. By choosing a case company that operates in a sector that has international competition, but also local, I’m able to also analyze the broadest possible set of implications of operating in emerging markets. If I instead selected a case company from a sector that is dominated by multinational players, as the international airline industry, the analysis would be of competition between MNE’s from developed markets to capture emerging markets, and not so much strategies of developed market MNE’s in emerging markets. Last, the initial investments for telecom operators entering emerging markets can be high, while the growth potential is enormous, which means that profit margins can be great for those who succeed, but those who are unable to gain critical mass struggle (www.dn.no July 14th 2010). Therefore telecom operators must carefully plan and execute their strategies when entering emerging markets, which assures me that I will be able to identify distinct strategies to base my investigation on if I choose a telecom company as a case company.

1.1.1 Company information

Telenor started out as a government agency in 1855 and has been known under various names. When the monopoly over the sale of telephone sets in Norway ended, and the Norwegian market for telecommunications terminals opened up to competition in 1988, they were operating under the name Norwegian Telecom (Televerket). In 1995 Televerket changed its name to Telenor, but was not partly privatized and listed on the stock exchange before year 2000. Today Telenor is one of the leading mobile operators in the world, with 203 million mobile subscriptions, a growth from 15 million subscriptions in 10 years. Telenor was one of the top 500 global companies by market value in 2010 according to the Financial Times Global 500, and are among the top performers on Dow Jones Sustainability Indexes. They have 33.200 employees worldwide and revenues of NOK 95 billion in 2010, where more than 50% of these revenues

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come from markets that are not developed. Telenor’s main operations are concentrated in three geographic regions that include developed, newly industrialized, and emerging markets:

Telenor is a leading provider of mobile and fixed services in Norway, Sweden and Denmark. The operations in Scandinavia represent Telenor’s operations in developed markets.

The Nordics

Telenor Group has a strong position as provider of mobile services in Hungary, Serbia and Montenegro. They also have an economic share of 39.6 per cent in VimpelCom Ltd., who offers mobile services in Russia, Ukraine, Kazakhstan, Georgia, Uzbekistan, Tajikistan, Armenia, Kyrgyzstan, Cambodia, Laos and Vietnam. All markets in this group are defined as emerging markets according to the worlds Emerging Markets Monitor.

Central and Eastern Europe

The Telenor Group is one of the largest mobile operators in Asia through their operations in Thailand, Malaysia, Bangladesh, Pakistan, and India. Malaysia is considered a newly industrialized economy, while the remaining countries are defined as emerging markets according to the worlds Emerging Market Monitor (www.telenor.com).

Asia

1.2Emerging Markets

A market is a place where transactions between buyers and sellers of goods and services take place. We can define markets by geographical boundaries; a market can be a country, but also a region. Another way of defining markets is to categorize it based on its characteristics. In everyday speech we often talk about developed and less developed countries, and by that we also mean developed, or less developed markets. Between developed markets and less developed markets there are emerging markets. Emerging markets are less developed markets that are at a later stage of development than other less developed markets. Khanna and Palepu (2010) argue the importance of distinguishing emerging markets from developed markets. This is despite that economic globalization has brought down trade and investment barriers, and enabled the emerging markets to seemingly converge with the world’s rich industrial countries, and integrated less developed countries in the global supply chain.

The fundamental distinction of an emerging market compared to a developed market is that

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come together. Emerging markets are also characterized by the many different informal institutions that have developed to serve intermediary roles, due to the lack of appropriate formal institutions. Other main characteristics that differentiate an emerging market from a developed market are:

Poverty: The market is in a low- or middle-income country, the average living standards are low, and the country is not industrialized.

Capital markets: Low market capitalization relative to GDP, there is a low stock market turnover and few listed stocks, and the sovereign debt ratings are low.

High growth potential:Characterized by economic liberalization, is open to foreign investment, and has experienced recent economic growth.

Emerging markets need to be distinguished collectively from developed markets, but also

individually from each other. Emerging markets can share some similar characteristics, but amongst emerging markets there can also be great variations. A typical emerging market that fit into all of the three criteria above is India. However, if we were to compare India with the United Arab Emirates based on poverty level and their GDP, it would suggest that the United Arab Emirates are among the world’s most developed economies. Still they are also an emerging market nonetheless, because of the market structure in the country (Khanna and Palepu 2010). For this investigation I will use the worlds emerging market monitor provided by Business Monitor International to decide if an market is emerging or not. I will define all emerging markets collectively when I’m using the theoretical framework related to emerging markets, and I will use country reports from the same monitor, and other external sources to separate each emerging market individually from each other.

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9 2. Hypothesis

The hypothesis of this thesis rests upon the idea that there are several distinct differences between the business environments in emerging markets compared to developed markets. Hence there should be a difference between the strategies of successful firms for their operations in developed, versus emerging markets.

3. Research Area

The research area of this paper will be how a MNE from developed markets, create strategies

that are sustainable to enhance growth in emerging markets. In terms of research this is an interesting area because it builds on recent research. However, while recent research focus on the conditions in emerging markets for developed market MNE’s that want to enter emerging markets, this research will focus on what MNE’s from developed markets are doing right in emerging markets. The approach I will use to investigate this research area will be constructivist. I will use theories from previous research to ask questions that will form the basis of my data collection. Conclusions will be made based on interpretations of collected data, and theories will be used as a tool to enhance understanding of data.

3.1Research Question

In this research I will use one critical case; Telenor, to answer a research question that concerns all cases. My research question is based on the assumption that Telenor is successful in emerging markets, and the hypothesis that emerging markets are different from developed markets. These assumptions will be critically evaluated throughout the report to ensure quality. To answer my research question I need to separate the strategies of the Telenor Group as a whole, from their strategies in emerging markets. Hence my research question will be:

How can a MNE from a developed market succeed in an emerging market? - Why does Telenor target emerging markets?

- Which of Telenor Group’s strategies can be identified as specific for emerging markets? - How, and where in the organization, is Telenor’s emerging market-strategies created? - Based on the coherence of their strategy in different emerging markets, does Telenor

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10 3.2Topic Delimitation

This thesis aims to give an overall view of Telenor’s strategies in emerging markets. Emerging markets can be distinguished from developed and less developed markets; however, there can also be great variations between each emerging market. I will give attention to this, but the scope of the investigation does not allow me to do a detailed analysis of every emerging market Telenor are operating in, instead I will look for overall patterns, taking the individual environments into consideration.

This thesis does not investigate the financial aspect of Telenor’s operations in emerging markets. I will sometimes use the sum of investments, profits or losses as a reference point, but the aim of this paper is not to investigate the financial perspectives regarding Telenor’s operations in emerging markets.

Business operations are to a large degree influenced by competitors. However, as this thesis main focus is on Telenor’s strategies for operating in emerging markets and due to limited time and resources I will not make an analysis of Telenor’s strategies for handling competitors.

Because this thesis will focus on Telenor’s operations in emerging markets I will give less attention to operations in developed markets. These operations will be used more as a reference point.

The operations of The Telenor Group are complex and it is important to do research on the organization as a whole to understand their operations in emerging markets, but this thesis will not focus on Telenor’s investments in markets where they are not directly operating through commercial activities.

To understand why Telenor are operating in emerging markets I must first understand why they are a multinational enterprise. I will present theory on this area that will be used in the early part of my analysis, and in the concluding part regarding emerging markets, but I will not go into a detailed discussion of the benefits of Telenor being a multinational enterprise in general.

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11 4. Method

The approach I will use to investigate this research area will be constructivist. Theories from previous research will be used as a tool to identify relevant questions for the purpose of my investigation. These questions will be the foundation from where I start my data collection process. The purpose of the data collection is to create a basis for an analysis that can answer to my research question. The analysis will by a constant interpretation of data as a guide for what to do next, coupled with a constant curious self-observant effort. This means that there might be sections where interpretations of concluding character will occur during the analysis to be able to move forward to the next step. Interpretations in the analysis will be based on what I know from facts, assumptions created in previous research, and what I understand from collected data based on this. In the analysis theories will be used as a tool to enhance understanding of areas where collected data does not provide answers. Final conclusions will be a collection of concluding interpretations in the analysis about Telenor that is put in a broader picture to provide recommendations for how all MNE’s from developed markets can succeed in emerging markets. Because I will use a constructivist method to solve my research question, it is important that the theories that will be used to create relevant questions for my research are also constructivist, in order to create the proper research tools. The process is guided by Flybjerg (2004) who has created a method for analyzing the nature of one specific case to make explanatory conclusions that aim to explain general tendencies. The remaining part of this section outlines my view on scientific method that will be used in this research, and the next section describes the view of Flybjerg in more detail.

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I will use selected theories to reach a general objective view that explains strategic choices made in Telenor’s operations in emerging markets. As a starting point the theories will give me a conclusion that can provide an answer to the hypothesis that operating in emerging markets is different from operating in developed markets. This analytical view of method requires work with given techniques that confirms or rejects given hypothesizes. This provides objective facts that create parts of the objective reality (Darmer 1992). Using this method will however not provide me the full understanding that is required to answer my research question, because analytical rationality only provides context-independent knowledge. Therefore I cannot reach the conclusions I’m searching for using analytical methods. To reach a conclusion about how MNE’s from developed markets can succeed in emerging markets, I must as a researcher put myself in the context that is being studied (Flybjerg 2004). I do this by being constructivist. By continually interpreting and analyzing collected data I will create a more subjective view of Telenor’s operations in emerging markets. This view will help me understand, instead of explaining, Telenor’s strategic choices. Only that way I can fully answer my research question about how a MNE from a developed market can succeed in an emerging market. This also means that I do not use a deductive approach to my research, because the theories create the foundation for my investigation, but the research question will be answered inductively. The use of an inductive analytical approach opens for the use of existing theory in analysis (Bryman and Bell 2005). The collected information will be emphasized before theory, and the selected theories that are research conducted by other researchers will mainly be used to find explanations. I will then move from the concrete collected data and look for patterns and categories during the analysis that will be summarized with a discussion of my findings.

4.1Methodology

To solve my research question I choose to focus on Telenor as a critical case, due to the criteria outlined in the introduction. Flybjerg illustrates the effect of using this method by quoting Karl Popper who said “all swans are white”, but the observation of one single black swan would falsify this proposition and in this way have general significance and stimulate further investigations and theory building.

There are many other optional approaches to investigate this subject. The investigation could also be done by obtaining and comparing data from a wide range of companies that fit the

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selection criteria, or by doing random samples. However, a research project based on collected data samples might not give me the necessary insight to the area I want to investigate. Flybjerg (2004) argues that when the objective is to achieve the greatest possible amount of information on a given problem or phenomenon a representative case, or a random sample, may not be the most appropriate strategy. This is because the typical or average case is often not the richest in information; it is often more important to clarify the deeper causes behind a given problem and its consequences, than to describe the symptoms and how frequently they occur. Random samples emphasizing representativeness will seldom be able to produce this kind of insight; it is more appropriate to select some few cases chosen for their validity.

Another option could be do a parallel investigation of business and operating environments in developed markets vs. emerging markets, and compare results. This would require an analytical method and lead to a theoretical conclusion. The disadvantage of this method is that the practical outcome of a real case that adds value to the investigation would be lost. This view is also supported by Flybjerg who says that the limitation of analytical rationality is that it is inadequate for the best results in exercise of a profession, a study, research or practice. Content-dependent knowledge and experience are at the very heart of expert activity; it is only because of experience with cases that one can move from being a beginner to being an expert. He argues that to make rule-based knowledge the highest goal of learning is regressive, and there is a need for both approaches because the highest level in the learning process. That is, virtuosity and true expertise are reached only via a person’s own experiences as a practitioner of the relevant skills. Concrete, context-dependent knowledge is therefore more valuable than the vain search for predictive theories and universals. For researchers, the closeness of the case study to real-life situations and its multiple wealth of details are important in two respects. First, it is important for the development of a nuanced view of reality, including the view that human behavior cannot be meaningfully understood as simply the rule governed facts found at the lowest levels of the learning process, and in much theory. Second, cases are important for researchers own learning process in developing the skills needed to good research.

It is important to recognize that when using case studies as a research method it is often difficult to summarize and develop general propositions and theories on the basis of the specific case. However, the question I asked myself when I decided to use this method is if it is desirable to

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summarize and generalize results. I want to present the most correct picture possible of the reality I’m observing. This means that I might able to say something in general about the case outcome, but I will probably also come to conclusions that cannot be forced into tables or models. Instead I will try to explain the cause and effect of my observations and what results or implications they lead to, or may lead to.

5. Theory

The selected theories cover two main areas. The first are theory about international production, and the second are theory about emerging markets. Following this I introduce theory about corporate branding and the theoretical view of strategy. Each section starts with an overview of relevant theories within the area, and the relevance of selected theories for this investigation. I also discuss possible limitations of the selected theories and the consequence the theory selection may have on the investigation. The selected theories are context-independent and can be applied to “all” situations. My goal is to reach an understanding of Telenor in several different specific contexts. The context-independent theories can help me reach that goal because they will help me develop an understanding. By applying these theories the investigation of one specific case I will put myself into the context being studied, and hence theory will be used as a reference point, and a guide to maneuver.

5.1International Production

I include theory about international production because it is that it is crucial to understand why Telenor is engaging in international business, before I can understand why they operate in emerging markets specifically. Although MNEs have existed for a very long time, scholars first attempted to understand the nature and drivers of their cross-border activities during the 1950s. The credit for providing the first comprehensive analysis of the MNE and of foreign direct investment goes to economist Stephen Hymer, who in his doctoral dissertation observed that the “control of the foreign enterprise is desired in order to remove competition between that foreign enterprise and enterprises in other countries. His key insight was that the multinational firm possesses certain kinds of proprietary advantages that set it apart from purely domestic firms thus helping it overcome the liability of foreignness (Hymer 1960).

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The transaction costs theories of MNEs was developed simultaneously and independently by McManus (1972), Buckley & Casson (1976) Brown (1976) and Hennart (1977, 1982) and offered an alternative to traditional neoclassical theory. The advantage of these theories is that it considers that market imperfections that are not counted for in neoclassical theory. These imperfections are likely to be even stronger in emerging markets than in developed markets, therefore it is important to understand the nature and origin of transaction costs. I selected the theory about MNE’s presented by Hennart (2000) because he has in his work been building in these theories developed by the authors above since the 1970’s. In the article by Hennart that I choose from 2000 he critically evaluates his previous work and makes reference changes in the market space since the initial development of the transaction cost theories for MNE’s.

Building on the theories on international expansion based on transaction cost theory, the theories about international expansion presented by Guilén and Garcia-Canal (2009) will enhance my understanding of the expansion path of Telenor from developed to emerging markets, and from one emerging market to another.Because I found some limitations to the explanations given by Guilén and Garcia-Canal about how a firm expands horizontally, I decided to add the Eclectic (OLI) Paradigm presented by Dunning that goes into greater detail about how a firm expands into foreign markets based on intangible assets as ownership, location, and internationalization-advantages. These advantages might explain why Telenor are expanding in a pattern that cannot be fully explained by the horizontal expansion pattern described by Guilén and Garcia-Canal. The advantage of the theory about horizontal expansion is that it considers the intangible assets as brands, technology, know-how, and other firm specific skills that a MNE may possess that are not emphasized in older theory about international production. Dunning opens for the possibility of the existence of such assets with his ownership advantages, but they are emphasized to the same degree as location and internationalization advantages, that are more relevant for manufacturing firms. However, the theory of horizontal expansion does not take location specific advantages into consideration, and hence the two theories add value to each other when used together.

The disadvantage of these theories is that though they may take modern market conditions into consideration, they nonetheless build on research from the manufacturing industry after the 2nd industrial revolution. Older research on international production are designed with the view that

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MNE’s are large firms from developed countries that serves consumers in developed countries, and may use less developed countries for production. When using this theory it should be taken into consideration that Telenor is not a manufacturing firm, they deliver a service, and their value is to a greater extent in their technological know-how, and their organizational brand. It should also be taken into consideration that the goal of their operations in emerging markets is to serve consumers in emerging markets as suggested by Guilén and Garcia-Canal, not to create a product that will be exported back to consumers in developed markets as suggested by Hennart and Dunning.

5.1.1 Transaction Costs and the Multinational Enterprise (MNE)

According to Hennart (2000) MNE’s exist because there are circumstances where individuals located in separate countries are more efficiently coordinated when they are employees of a Multinational Enterprise, than if they are independent entrepreneurs responding to market prices. Further he uses Transaction Cost Theory to explain why firms engage in business abroad, instead of selling their assets, or rent them out to a local entrepreneur in another country who could combine them with local factors of production at lower costs than those experienced by foreign investors.

Transaction cost theories is an alternative to traditional neoclassical theory because transaction cost theory considers the market imperfections that are inherent conditions in real markets. In neoclassical theory these imperfections are ignored. In the real world knowledge is not perfect and people are not perfectly honest. This creates transaction costs, or costs for organizing interdependencies between individuals. In a perfect market without transaction costs, with a large number of buyers and sellers, prices would be determined by demand, bargaining would not occur, and everyone would be fully appraised of everyone else’s needs through prices, and incited to adapt to those needs to maximize social welfare. However, because people tend to be opportunistic we cannot expect them to take actions that increase the welfare of others at their own expense. Humans also have bounded rationality, which means that they do not have infinite intellectual abilities and are not perfectly knowledgeable. Because of this transactors cannot always predict who will be opportunistic and not. In other words it is possible for individuals to cheat, imperfect information creates prices that are not solely determined by demand, and bargaining can be profitable (Hennart 2000). In emerging markets, that are characterized by

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weak formal institutions, uncertainty regarding law enforcement and political instability (Khanna and Palepu 2010) market implications are even larger than in developed markets, which increases the relevance of this theory presented by Hennart for this research.

MNE’s use hierarchy to reduce transaction costs when operating abroad. When independent entrepreneurs are transformed into employees their incentives to cheat is reduced. This happens because they are paid for their input instead of their ability to change the market terms of trade in their favor. However hierarchy also has its costs. Mainly that the incentives of the agents change. When rewards are no longer proportional to output, the management cannot always expect their employees to give their best in terms of input and efficient information gathering. The cost related to this is an expansion of resources to motivate and monitor employees. This means that the MNE does not avoid the market when it internalizes a transaction (transforming local entrepreneurs abroad to employees). Instead the transaction shifts from the market for goods and services, to the market for labor. The internalization of a market (the expansion of firms abroad) will take place when transaction costs in the product market are higher than those experienced in the labor market (Hennart 2000).

5.1.2 Vertical and Horizontal Expansion into Foreign Markets

When a company is expanding across national borders it can so vertically or horizontally. It is important to distinguish between the two modes of expansion to fully understand the basic economic principles behind the activities of MNE’s. Telenor are expanding horizontally into foreign markets. Horizontal expansion occurs when the firm set up a plant or service delivery facility in a foreign location with the goal of selling in that market, while maintaining its business in the home country. A firm may choose to set up a plant or service facility in a foreign market because they posses some intangible assets. This can be a brand, technology, know-how, and other firm specific skills. The possession of such skills makes licensing a risky alternative because the licensee might appropriate, damage, or otherwise misuse the firm’s assets (Guilén and Garcia-Canal 2009). To understand Telenor’s expansion pattern it is then important that I understand which intangible assets they possess.

While these intangible assets explains why Telenor is expanding into foreign markets, this theory also states that firms expand abroad horizontally on a country-by-country basis, starting with

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those who are more similar in terms of sociocultural distance. The Firm commits resources to foreign markets as it accumulates knowledge and experience, managing the risks of expansion and coping with the liability of foreignness. The firm expands abroad only as fast as its experience and knowledge allow (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul 1975; Vernon 1966, 1979, cited in Guilén and Garcia-Canal 2009). Based on this I assume that Telenor has chosen their strategy of expansion based on experience and knowledge of the markets they enter. However, if this is true, that implies that Telenor should have more knowledge and experience in Eastern European and Asian markets than countries as the UK, USA or Canada that in many aspects are closer to Norway in terms of sociocultural distance. In my analysis I will try to find an explanation to Telenor’s expansion pattern based on the theory of horizontal expansion, but to fully understand Telenor’s expansion pattern I will also use the Eclectic (OLI) Paradigm developed by Dunning (2001).

5.1.3 The Eclectic (OLI) Paradigm of International Production

When expanding abroad Telenor has chosen a specific expansion path, from its neighboring countries in northern and Eastern Europe to Asia. The strategies behind this expansion path can be explained using the Eclectic (OLI) Paradigm of International Production, created by John Dunning. This theory is designed for the US manufacturing industry, but because its purpose is

to explain the extent and pattern of international production I can apply this theory to Telenor to analyze if Telenor has ownership, location, or internationalization advantages that can explain why Telenor have chosen this specific path of expansion.

International production is defined by Dunning as “production financed by FDI and undertaken by MNE’s”. The three sets of forces that determine this is 1) the competitive advantages that arise from a firm’s ownership, or access, to income generating assets. Their ability to coordinate these assets with other assets across international boundaries, in a way that benefits them relative to their competitors and potential competitors. 2) The extent to which firms perceive it to be in their best interests to internalize the markets for the generation and/or the use of these assets; and by so doing add value to them. 3) The extent to which firms choose to locate these value-adding activities outside their national boundaries (Dunning 2001).

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Dunning’s primary inspiration for the Eclectic Paradigm came from research by Rostas (1948) and Frankel (1955), which showed a 2 to 5 times higher productivity in the US manufacturing industry than the productivity in the UK manufacturing industry. Dunning set out to investigate if the difference in productivity was a result of immobile resources in the US home-economy, or if it was due to the structure and management of the US firms, a resource Dunning argues that at least to some extent, is transferable across national boundaries. (Dunning 2001)

O: The OLI paradigm is the tripod in explaining the scope and geography of value added activities by multinational enterprises. Dunning’s initial hypothesis was that the advantages of the mother company in terms of the organization, structure and management, would be transferable to the foreign subsidiary in the UK; the ownership effect advantages (trademark, production technique, entrepreneurial skills, returns to scale). This represents the “O” in the paradigm, where “the productivity differences are presumed to rest on the spatially transferable intangible assets of the parent companies” (Dunning 2001 p.174).

L: The “L” was assed when Dunning discovered that the US affiliates were not as productive as their parent companies, but more productive than their local competitors in the UK. If the foreign subsidiary does not perform according to the standards of the mother company Dunning assumes that this might be because of location specific characteristics of the environment of the mother company. Hence the “L” in the OLI paradigm describes the location specific advantages

(existence of raw materials, low wages, special taxes or tariffs) component of any productivity differential. (Dunning, 2001)

I: To distinguish between the competitive advantages of countries and the competitive advantages of firms, Dunning extended his research in 1976 with a paper that suggested that a country’s economic space could be considered in two ways. The first was the value of output produced within its national boundaries independently of the ownership of that production. The second was the output produced by its own firms, including that part produced outside its national boundaries. This introduced another variable in explaining the determinants of foreign production. To understand why a firm succeeds, (or does not succeed) abroad, we must also understand the way firms organize and generate their resources and capabilities in different locations where they are available. This variable is called internationalization advantages

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(advantages by producing through a partnership arrangement such as licensing or a joint venture) and represents the “I” in the OLI paradigm (Dunning, 2001).

Identifying the ownership, location, and internalization advantages of Telenor will add value to conclusions regarding Telenor’s expansion pattern using horizontal expansion theory. When looking at a firm based on their intangible assets I assume that the firm can operate in any environment, as long as they have the necessary advantages, and hence I ignore the institutional aspect. While Dunning touches on this with the location-specific advantages I also need to carefully consider the operation environment in emerging markets specifically when I investigate Telenor’s operations there. The next section will take us through emerging markets from an institutional perspective.

5.2Emerging Markets

Theories about emerging markets will help me understand the conditions that separate emerging markets from developed markets and the opportunities and limitations this creates for MNE’s from developed markets. Understanding the market context will also help me understand strategic choices made in that context.

Emerging market theory is a relatively new area, just as emerging markets are developing rapidly the theory within this area develops rapidly. When I searched for theories in this area I searched for theories that would be fairly new, to ensure relevance of the theories to analyze operations in emerging markets today. Emerging market theory can to a greater extent be found in newly released articles than in books, and also include analyst reports on consumers and business environment in emerging markets. In addition to publications from large international business schools, publishers such as The Economist and the Financial Times are contributing to large part of the publication of articles about emerging markets. Another important source of information about emerging markets are reports conducted by consultancy firms for their clients about operations in emerging markets, and the firms themselves. This section rests heavily on the theories of Khanna and Palepu (2010) from their book Winning in Emerging Markets. The problem with these theories is that while Khanna and Palepu state that emerging markets should be differentiated collectively from developed markets, they should also be differentiated separately from each other. Still Khanna and Palepu does not offer a theoretical framework for differentiating emerging markets from each other, but instead theories based on the general

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characteristics that can be found in most emerging markets. This means that the user of these theories at all time need to consider the context they are analyzing and selecting the part of the theoretical framework that applies to the relevant context. The benefits of the theories presented by Khanna and Palepu is that they are specially designed for MNE’s from developed markets operating in emerging markets, which makes them very relevant for this research. These theories also cover a wide area of characteristics that are typical for emerging markets and hence the theories can be applied in most situations. They also provide practical suggestions for action, which gives an opportunity to compare and contrast the strategic choices being made in the actual context, to the theoretical context-independent suggestions for action. There is however sometimes a need to go into greater detail than Khanna and Palepu are doing in some areas. I have supplemented this theory section that is mainly based on Khanna and Palepu with theory from Allen et.al (2007) about the bottom segment of the consumer pyramid, and Woolridge (2010) and Guilén and Garcia-Canal (2009) about the competitors from emerging markets.

5.2.1 Institutional Environment in Emerging Markets

According to Khanna and Palepu (2010) emerging markets are hardly uniform in the nature and extent of their institutional voids. The development of business strategy in any economy is driven by three primary markets – product, labor, and capital – and institutional voids can be found in any, or all, of these markets in emerging markets. To spot these institutional voids is a key first step when entering emerging markets.

When using an institutional approach to consider emerging markets we specify the particular combination of features that prevent efficient exchange in each market. Some countries might lack specialized intermediaries in the labor market but have them in abundance in the capital markets, because product and factor markets within developing countries often develop at different rates.

Institutional voids have real effects on business strategy. Companies rely on intermediaries as market research firms for to understand customer preferences. Identifying and segmenting the market are immeasurably more difficult without market research specialists acting as intermediary. In terms of company operations, firms’ options for supply chain management depend entirely on available logistics intermediaries. Financing options depend on capital market intermediaries, such as commercial and investment banks. Human resource capabilities depend

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on intermediaries such as business schools and executive search firms, because identifying and screening candidates for managerial positions entirely in-house carry significant costs.

Politics, history and culture affect the development, form, and function of institutions and the existence and persistence of institutional voids. For example the rule of law and the regulatory institutions that govern efficient transacting in developed markets may be missing in economies that have significant asymmetries of power resulting from a transitional country's sociopolitical heritage. MNE’s who are entering emerging markets can identify voids in the institutional environment before they establish their business there and tailor solutions that fit the particular market they have chosen to enter, and also evaluate if this is an environment that the company are able to work in (Khanna and Palepu 2010).

5.2.2 The Consumers in Emerging Markets

Understanding the consumers in emerging markets is crucial when designing strategies for operating in emerging markets. Different consumer groups require different levels of products and product adaptation, which also means a different level of strategy adaptation. Identifying which consumer segments Telenor are targeting in emerging markets then provides insight into some of their strategies in emerging markets. One of the main characteristics of an emerging market is its general level of poverty. The market is a low- or middle-income country, and the average living standards are low (Khanna and Palepu 2010).

In most emerging markets there is also a growing middle class. However the purchasing power of this middle class is not equivalent with what is characterized as middle class in developing countries. The top part of the income pyramid in emerging markets, and the consumers that are considered upper class, often have a purchasing power more equivalent to the developed country middle class, and represent only a small part of the country's population. The pyramid below roughly illustrates how income is typically divided in an emerging market:

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This must be taken into careful consideration when doing business in emerging markets. We can distinguish consumers in emerging markets in general from consumers in developed markets by that they are «poor». However, within emerging markets there are many different segments of consumers with different purchasing power, and different strategies that best suits the need of each

segment. Market segments in emerging markets are distinguished not only by income and prices,

but also by needs, tastes, and psychographic characteristics. Targeting particular segments requires particular capabilities and knowledge, not simply different price points. Khanna and Palepu (2010) divide the consumers in emerging markets into four categories: Global, Emerging Middle Class, Local, and Bottom Segments. The three variables that distinguish these four consumer categories are: price, quality, and features. Other similar categorizations are available from other researchers and there can be more or less layers. These categories are a rough illustration of millions of consumers in hundreds of markets, therefore the actual division is not as important as the specific traits of each segment and the strategies required reaching them.

Global:

The global segment of consumers in emerging markets consist of consumers who want offerings having the same attributes and quality as products in developed countries, and who are willing to pay global prices for them. When emerging markets open up, multinationals based in developed markets quickly come to dominate this segment of consumers because it is their natural niche. Also many multinationals find it difficult to serve anything but this segment because of the institutional voids in emerging markets.

Local:

The local segment of consumers represents the layer below the emerging middle class. The local consumers in emerging markets look for products with global (or near global) quality, but with local features and prices. The consumers in the local segment typically consist of lower middle class. Local knowledge is a powerful source of competitive advantage in this market segment, both to tailor products, and to navigate voids. This makes local companies market leaders in this segment and multinational enterprises need to adapt to reach this consumer segment.

Emerging middle class:

The emerging middle class segment of consumers in emerging markets is consumers who demand products or services having a combination of global and local price, quality, and features. An example of this is that Chinese and Indian executives might prefer Shangri-La

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hotels over Four Seasons. Both local and multinational companies that are separately established in the local and global market segment look to the emerging middle class for growth opportunities. However, they both need to adapt to reach this segment. MNE’s need to localize their products to reach local price points and to do this they need local knowledge to redesign products without sacrificing quality. Local companies need to deliver higher quality items, and to design products that satisfy unique local needs.

Bottom:

The bottom segment is people who can afford only the least-expensive products. This group represents the largest group of consumers in many emerging markets. The very poorest consumers in emerging markets have been receiving increased attention from MNE's. C.K. Prahlad of the University of Michigan has called this market segment «the bottom of the pyramid». The interest in this market segment has created an area of research called BOP theory.

In their article from 2007 Allen, et al. states that 4 billion consumers, a majority of the world’s population, constitute the base, or the bottom, of the economic pyramid. They have daily incomes below $3 (in local purchasing power). Yet together they have substantial purchasing power: the BOP constitutes a $5 trillion global consumer market. The BOP makes up 72% of the 5,575 million people recorded by available national household surveys worldwide, and an overwhelming majority of the population in the developing countries of Africa, Asia, Eastern Europe, and Latin America and the Caribbean - home to nearly all the BOP. New empirical measures of their aggregate purchasing power and their behavior as consumers suggests significant opportunities for market-based approaches to better meet the needs of the BOP, increase their productivity and incomes, and empower their entry into the formal economy. (Allen et al. 2007)

Consumer patterns at the bottom of the pyramid:

Research has also shown that there are some striking patterns in the spending behavior of consumers from the bottom of the pyramid. Food dominates BOP household budgets, but as incomes rise the proportion spent on food declines, while the share for housing remains relatively constant, but the share of income spent on transportation and telecommunications grow rapidly (Allen et al. 2007).

So far perhaps the strongest and most dramatic BOP success story is mobile telephony. Between 2000 and 2005 the number of mobile subscribers in developing countries grew more than

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fivefold to nearly 1.4 billion. A strong value proposition for low-income consumers has translated into financial success for mobile companies. Celtel, an entrepreneurial company operating in some of the poorest and least stable countries in Africa, went from start-up to telecom giant in just seven years. Acquired for US$3.4 billion in 2005, the company now has operations in 15 African countries and licenses covering more than 30% of the continent. (Allen et al. 2007). Growth in the telecom sector has been rapid in all emerging regions. Household surveys confirm substantial and growing mobile phone use in the BOP population, which has clearly benefited from the access mobile phones provide to jobs, to medical care, to market prices, to family members working away from home and the remittances they can send, and, increasingly, to financial services (Vodafone 2005, cited in Allen et al. 2007).

The section below will take us through the strategic choices MNE’s are faced with when reaching for the different consumer segments in emerging markets according to Khanna and Palepu.

5.2.3 Strategic Choices for MNE’s from Developed Markets in Emerging Markets

The opportunities for traditional MNE’s in emerging markets should now be fairly clear, but in order to operate in a market with a variety of institutional voids MNE’s are faced with a set of strategic choices. MNE’s from developed markets have built businesses on foundations of strong market infrastructure. These institutions play a critical role in the ability of developed market-based multinationals to execute their standard business models, and are often noticed only when they are missing. In emerging markets these institutions cannot be taken for granted (Khanna and Palepu 2010).

These strategic choices are closely tied to the various market segments within emerging markets. Both output and input markets can be segmented into global, emerging middle class, local, and bottom segments. Different strategies in response to institutional voids position traditional MNE’s to reach different market segments.

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Table 1. Responding to institutional voids in emerging markets

Strategic Choice Options for multinationals from developed markets

Replicate or adapt? • Replicate business model, exploiting relative

advantage of global brand, credibility, know-how, talent, finance, and other factor inputs • Adapt business models, products, or

organizations to institutional voids

Compete alone or collaborate? • Compete alone

• Acquire capabilities to navigate institutional voids through local partnerships and JV’s

Accept or attempt to change market context?

• Take market context as given

• Fill institutional voids in service of own business

Enter, wait, or exit? • Enter or stay in market despite institutional

voids

• Emphasize opportunities elsewhere Source: Khanna and Palepu (2010) Table 4-1, Responding to institutional voids in emerging markets

This model covers a wide area and suggests general strategic choices. Because every emerging market is different it is impossible to make a context-depended model for such decisions. Therefore this model is only valuable when it is developed with context knowledge and variables such as the actual degree of adaptation required are added.

Replicate:This strategic choice has two options. A company who is looking to serve the global segment of the market should choose to replicate its business model. The competitive advantage of MNE’s tied to their global brand, credibility, know-how, talent, and resources are valuable in emerging markets, and MNE’s can exploit them by replicating their home-market business models with little modifications. By doing this they are able to bypass domestic rivals that lack intermediaries that help companies’ acquire and build these capabilities. This strategic choice is suited for companies serving the global market segment because this segment features infrastructure, tastes, talent, and resources that are similar to those in developed countries (Khanna and Palepu 2010).

Replicate or Adapt?

Adapt:If the company wants to reach customers and access talent and resources in the emerging middle class, local, and the BOP segments, they should instead adapt their business model. To reach these segments MNE’s need to adapt not only their product offerings, but also business processes to reach price points, and organizational structures in the light of the institutional voids that they may sidestep if they choose to replicate their business model and serve only the global

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market segment. This is a difficult strategy for MNE’s in emerging markets for a number of reasons:

• Local knowledge is critical to target segments efficiently

• Acquiring local knowledge is difficult in the absence of sophisticated market research intermediaries

• Local knowledge is critical to tailor products to local needs

• Meeting lower price points can be a source of internal stress

• Absence of retail chains and third-party logistics providers requires adaptation of the approach to distribution to reach customers outside urban centers

• To attract talent in the absence of information and certification intermediaries the MNE’s need to create new methods to attract, sort, and motivate employees

The pitfalls for companies who choose the strategic choice of adapting their business model is that they may localize too much, and thereby undermine their advantages of scale and branding while creating operational complexity. Different emerging markets also often require different forms of localization and these divergent adaptations can strain multinational organizations. It is important that organizations that choose this strategy decide which parts of their business model that should remain untouched, and carefully manage any modifications of the rest (Khanna and Palepu 2010).

Partnerships or joint ventures with local companies can be the price of admission for MNE’s to some emerging markets. When faced with a choice between collaborating and competing alone partners can also serve as a valuable source of local knowledge and substituting for missing market intermediaries. However, institutional voids can also make partnerships more difficult. The first challenge is to evaluate potential partners (Khanna and Palepu 2010). Further technology transfer agreements and lack of property right enforcement can create powerful competitors out of former partners. A MNE should compete alone if there is a high degree of uncertainty related to trust and property protection even if they have little market knowledge. When there is a low degree of uncertainty the company can access valuable knowledge and resources by pairing up with a local partner (Khanna and Palepu 2010).

Compete alone or collaborate?

By entering an emerging market early a firm can enjoy the benefits of being a first mover. The risk of doing so is that you are faced with a high risk environment and an unknown range of institutional voids. This risk can be mitigated by waiting to enter. This option also gives time to

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learn about the local market and customer needs, and you can enjoy the benefits of efforts made by first movers when faced by institutional voids, but you lose the advantage of being a first mover, and face disadvantages of being a late mover. Advantages of being a first mover include high growth potential and low competition, while a late mover might enjoy the benefits of investments and market openings made by first movers, but they also have to deal with established competition (Khanna and Palepu 2010).

Due to these advantages and disadvantages a firm should enter an emerging market early if they think they have the capability to survive in a high risk environment characterized by institutional voids, perhaps due to a local partner. A firm that does not want to be exposed to high risk should wait, and a firm that has already entered but are making losses should exit if the cost of doing so is lower than their losses.

5.2.4 The Multinational Enterprise from Emerging Markets (EMNE)

In their article from 2009, Guilén and Garcia-Canal discuss to what extent there is need for new theory on MNE’s to explain the international growth of MNE’s from Emerging Markets (EMNE). The basis for this discussion is a change in the global market competition since the 1990’s, as the global market is becoming increasingly populated by MNE’s originating from countries that are not amongst the most advanced in the world. The number of companies from Brazil, India, China or Russia on the Financial Times 500 list more than quadrupled in 2006-08, from 15 to 62 (Woolridge 2010). With the increasing competition from EMNE’s it is becoming increasingly important for traditional MNE’s to understand how they work. This is especially important if they want to grow in the EMNE’s home market. I have included theory about how EMNE’s work differently from traditional MNE’s from developed markets because large multinational enterprises from emerging markets are both Telenor’s competitors, and also sometimes their partners, and by understanding how they work, we might get insight to some of the reasons behind potential difficulties in emerging markets. As every emerging market is different, every EMNE is different therefore value is added when this framework is applied to specific contexts.

The EMNC have home-grown competitive advantages that easily can be transferred to other emerging, or developing countries, where they can generate profits, and gain size and operational

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experience. The traditional MNE’s have longstanding traditions, organizational cultures, and structures that is difficult to change. EMNE’s have been able to adapt a number of organizational forms that suits their needs. Because they do not face the constraints typical of the developed market-MNE, the EMNE’s enjoy more freedom to implement organizational innovations to adapt to the requirements of globalization (Mathews, 2006, cited in Guilén and Garcia-Canal, 2009). The EMNE’s also are known to make moves that make little sense to Western managers. A property company might suddenly move into computers and an electronics company might start producing baby strollers. Rather than worrying about synergies or core competencies, they see opportunities and seize them (Woolridge 2010).

The EMNE’s have an advantage towards traditional MNE’s because they are more used to dealing with discretionary and/or unstable governments in their home country and hence better prepared than the traditional MNE’s to succeed in foreign countries characterized by a weak institutional environment. Because the most attractive markets in the world today for many multinational enterprises is in emerging markets, the experience with unstable political environments has been an extra powerful advantage for EMNE’s. (Guilén and Garcia-Canal 2009)

Political Capabilities

One of the main characteristics of EMNE’s is that they are coming up with new products and services that are dramatically cheaper than their Western equivalents: $3,000 cars, $300 computers and $30 mobile phones that provide national service for just 2 cents a minute. They are able to do this by reinventing systems of production and distribution, and experimenting with entirely new business models. All the elements of modern business, from supply chain management to recruitment and retention, are changed or reinvented on one emerging market after another (Woolridge 2010). Woolridge argues that old assumptions about innovation are now being challenged with the success of the EMNE’s. While people in the west like to think that ideas are created in their home laboratories and exported to the developing world, and that technological breakthroughs is revolutionary new products created by the elites and sold to the masses, this does not necessarily reflect reality of business innovation today. Innovation in emerging markets is about more than redesigning products to fit new groups of consumers, it is

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